New to this sight and looking for ideas and advise on a 1031

[Jeff Crowson]

Hi everyone, I am purchasing some properties and am trying to decide if I should leverage several 3 to 6 properties or what?  Just had an offer accepted on a 4 plex in San Antonio area, new construction for 570K as of now putting down 300K and financing the rest probably going with a 15 yr. fixed but considering other options.  Each unit will rent for 1350 each then I have the usual cost PM etc. Don't need the cash flow now because I am still running my construction business for another 8 to 10 years God willing!  I am also looking in the middle Tennessee greater Nashville area.  I have 430k cash to work with excellent credit, what would you do in my position?  I will be needing the income from these properties once I retire, I also own a home in N. Scottsdale area that is leased out and paid for that property is worth about 500k and rents for 2,250 per month.

I reside in northern CA. Napa area but with the taxes and high property cost I have decided to look out of state for investment purposes and better ROI long term. I am also considering another SFR in Texas as well, even though I have had a rental/investment property since 2004 I consider myself a rookie when it comes to investment properties. Any input would be greatly appreciated and criticism is welcome , just trying to navigate through this 1031 situation and come out ok in the end. I can also adjust the down payment on the 4 plex it is early in the process. Thank you all very much!

Jeff C.

[Michael Meade]

@Jeff Crowson, It sounds like you're in a situation that many of us would love to be in.  Good job.

Firstly, there are some strict time lines you must meet with a 1031 exchange.  You must identify your next property within 45 days of the sale of your relinquished property, and you must purchase your next property within 180 days of the sale of the relinquished property.  Also, you cannot personally receive the funds when you sell the old property.  You must have the funds sent to a 1031 intermediary until you buy the new property(ies).  I'm not sure when you sold your property or how you handled the proceeds, but those are pretty firm requirements.  I'm no expert, but I'm familiar with the process.  I have a contact of a 1031 intermediary that everyone in my Nashville real estate investors network swears by.  I can pass her info along if you wish.

Secondly, as far as rentals go, I would also recommend following the 1% rule as well.  Sorry if you already know this but since you consider yourself a rookie, the 1% rule is where your monthly gross rent is at least 1% of the purchase price.  For example, a home that cost $100,000 should rent for $1,000 per month.  If you follow this rule, you're less likely to run into financial trouble during down times, and it generally leads to better cash flow returns.  

Also, typically you get a better cash on cash return when you use leverage to acquire properties instead of paying all cash or large down payments.  I'll do an example using your San Antonio 4plex excluding all expenses (taxes, insurance, repairs, etc).  A $270k  ($570k-$300k) loan at 4% for 15 years has a payment of $1,997/month.  That would leave $3,403 ($1,350*4-1,997) cash flow per month or $40,836 per year.  Since you put $300k down, that's a return of 13.6% (40,836/300,000).  If you do a 25% down loan for 30 years at 5%, that's a monthly payment of $2,295.  You only cash flow $3,105 per month or $37,260 per year.  However, since you only put down 25% or $142,500, you return is now 26% (37,260/142,500).  This is a dramatic oversimplification since I haven't included expenses, but the principle is that if you get a long term loan with a minimum down payment, you can get a much better return on your investment, assuming you follow the 1% rule.  Then you just acquire more properties with better turns as opposed to 1 or 2 properties with all cash or big down payments.  There's a really good rental property analyzing tool on this site I would recommend utilizing.  Just go to Tools and click on Rental Property Calculator.

Lastly, I'm in the Nashville area.  It's a great market.  It's hard to find the 1% rule in the city.  Surrounding areas are also in high demand, and the 1% rule is obtainable there.  It's a great market to be in.  I would recommend multifamily over single family just for the ability to scale.  I would recommend looking into apartments over $1.5 million.  You are able to get Fannie Mae or Freddie Mac loans which are very favorable and allow for better returns than apartments under $1 million.  I'd be happy to talk further, but I'll stop taking up a whole page here.  Good luck!

Michael Meade